Beware the blind spot: new research shows SME businesses are ‘locking in’ future climate risks
Many small and medium-sized enterprises (SMEs) in the UK are ill-equipped for an unpredictable future, and are making business decisions today which will ‘lock in’ future risks from disruption like floods or heat waves.
This is the warning from the authors of a new paper “The risk of corporate lock-in to future physical climate risks: the case of flood risk in England and Wales” published today Monday 22 November by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science (LSE). Its authors are Shilpita Mathews, Viktor Roezer and Swenja Surminski.
The paper finds that many businesses have a blind-spot for future climate risks – with low levels of awareness of the growing risks, limited ability to make assessments, and little understanding of the potential costs from flooding and other weather disruption.
Decisions on the location, infrastructure, supply chain networks or core business models of new business sites can ‘lock in’ future risks, and may be difficult and costly to reverse. The threats can be from extreme weather including heat waves as well as from fluvial, coastal or surface water flooding.
New analysis of Ordnance Survey data shows that ten percent of new business premises built in England and Wales between 2008 and 2018 will be exposed to high or medium level flood risk by the 2050s under a two degree warming scenario, and that fifteen per cent of businesses will be exposed in a world on track to warm by four degrees Celsius.
The data shows that almost eight per cent (7.82%) of new business premises in England and Wales were built in medium or high risk flood areas. The top three sectors at current risk from flooding are water supply, sewerage, waste management and remediation activities (14.29%); accommodation and food services (12.36%); and transport and storage (9.50%). Future exposure of businesses built between 2008 and 2018 is mainly in information and communication (40%); water services (28.6%); and electricity sectors (23.4%).
The paper includes the results from a new survey for the Grantham Research Institute, which ran from November 2019 to March 2020, and received 225 responses from businesses in 19 different sectors across the UK. It found that while many businesses (45.38%) are concerned about possible climate risks, they have not yet assessed them. Businesses perceive the most common risks as surface water flooding (22.73%), heatwaves (18.88%), and fluvial and coastal flooding (14.69%). These hazards impact businesses with increased operation costs, physical damage, and reduced labour productivity.
In terms of the financial impact of flooding, of those businesses which have been affected by flooding in the past year, half (49.5%) said they expect the potential financial impact to increase over the next three to five years. Despite this concern, only 13.40% of the businesses impacted by flooding could give a specific number for what it cost them. Of those that could, costs ranged between £12,000 – £250,000 over 2019- 2020.
The researchers found that, given the current and future flood exposure, there are numerous gaps in business perception of risk both at the sectoral and regional level. Economically critical sectors with a high percentage of newly built premises in high or medium risk areas, such as finance and insurance (9%) and manufacturing (8%), fall between the 10th-50th percentile of both fluvial and coastal flooding and surface water flooding risk perception, indicating that businesses are not adequately aware of current flooding risks.
Swenja Surminski , Head of Adaptation Research at LSE’s Grantham Research Institute on Climate Change and the Environment, said:
“It’s worrying that businesses are underestimating physical climate risks. The gaps we found in risk awareness and flood exposure demonstrate the need for urgent action – especially in specific sectors such as manufacturing and finance. Flooding and other weather disruption will have significant consequences for businesses, including site-level damage, asset write-downs, stranded assets and implications for development.”
Viktor Roezer, Research Officer at LSE’s Grantham Research Institute on Climate Change and the Environment, said:
“The decisions that are being made now may lock-in risk for years to come. If a business site faces increasing flood risk in years to come it may become expensive to insure and difficult to operate.
“While larger businesses may be able to afford analyses showing the future risks of flooding, SMEs – which account for 99% of businesses globally – often lack resources to be able to make these assessments, and therefore prevent themselves from ‘locking-in’ future risks. As such, smaller businesses may have a blind spot for this and ultimately face being left behind.
“Those businesses which are switched on to this, and able to make decisions which do not lock in climate risks, may well reap competitive advantages in years to come.”
Shilpita Mathews, an economist who was working at LSE’s Grantham Research Institute on Climate Change and the Environment at the time of the research, said:
“Locked-in risks from future weather disruption need to be taken seriously. In the case of surface water flooding, the locked-in risks can have higher private costs than fluvial and coastal flooding since coastal and river flood protection is better defined by the Government. Government oversight may be needed here to help businesses with information provision, such as updated surface water flood maps and data granularity at the business premise level.”
The empirical analysis was conducted as part of the Zurich Flood Resilience Alliance and the business survey was conducted as part of the third UK Climate Change Risk Assessment.
For more information or for interviews with the authors, please contact Anna Ford on a.ford1@lse.ac.uk or gri.media@lse.ac.uk.
Notes to Editors:
The Grantham Research Institute on Climate Change and the Environment was established in 2008 at the London School of Economics and Political Science. The Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute – Climate Change and the Environment at Imperial College London. www.lse.ac.uk/grantham/
The ESRC Centre for Climate Change Economics and Policy was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council. www.cccep.ac.uk